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Goldman Sachs' ETFs seeing more inflows than other new entrants

Fourlarge, traditional mutual fund management companies have recently entered the exchange-tradedfund arena, and Goldman Sachs GroupInc. appears to be the early winner at attracting inflows.

In responseto increased investor appetite for low-costpassive strategies, JPMorganChase & Co. unit J.P. Morgan Asset Management its first ETF in June 2014. GoldmanSachs unit Goldman Sachs Asset ManagementLP and Manulife FinancialCorp.'s John Hancock InvestmentsLLC followed with their own offerings in September 2015. Through itsQS Investors LLC division,Legg Mason Inc. rolledout its ETFs in December 2015.

All fourcompanies' ETF offerings use an alternatively-weighted approach, commonly knownas smart beta, to competeagainst the more established market-cap weighted industry heavyweights. Since theend of 2015, these companies have launched an aggregate of nine additional ETFs.J.P. Morgan took an additional step to expand its ETF presence with the April 14announcement of a minoritystake investment in Global X ManagementCo. LLC.

So far,the Goldman ETFs have pulled in the most money compared to those created by theother three new entrants. As of March 31, the Goldman Sachs ActiveBeta EmergingMarkets Equity ETF (GEM) had $633.1 million in assets under management, up from$20.1 million at the end of September 2015. The highest country exposures are HongKong, Korea and Taiwan. The fund carries an expense ratio of 0.45%, which is 30basis points higher than VanguardGroup Inc.'s emerging markets fund, but 24 basis points below 's iShares MSCI EmergingMarkets ETF (EEM).

At amere 9 basis points, the Goldman Sachs ActiveBeta US Large Cap Equity ETF (GSLC)has by far the lowest expense ratio in the new entrants list. The ratio matchesthat of its larger peer, SSgA FundsManagement Inc.'s SPDR S&P 500 ETF (SPY). GSLC grew to $424.0 millionas of March 31 from $58.9 million at the end of September 2015. Relative to SPY,GSLC is underweight technology stocks, with more of a focus on the consumer discretionarysector.

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Goldman'sETFs screen companies based on four fundamental factors: value, quality, momentumand low volatility. Criteria include price-to-book, price-to-sales, gross profit-to-assets,beta- and volatility-adjusted daily total returns over  an 11-month period ending one month before itsrebalance date and the inverse of the standard deviation of daily total returnsover 12 months. These funds are rebalanced on a quarterly basis.

In termsof methodology for index construction, the three other new ETF providers have someoverlap with Goldman Sachs. J.P. Morgan screens stocks based on value (price-to-book),momentum (volatility of one-year returns) and quality (return on equity) criteria.Sectors and stocks are weighted inversely by volatility. The company utilizes thesame multifactor approach for U.S., developed international and emerging marketETFs. It also rebalances on a quarterly basis.

The JPMorganDiversified Return International Equity ETF (JPIN), which launched in November 2014,was the largest of the company's ETFs at the end of March, with $187.9 million inassets. JPIN's 0.55% gain in the first quarter of 2016 was stronger than the 2.99%loss for the iShares MSCI EAFE ETF (EFA).

For itsdiversified U.S. and sector-specific ETFs, John Hancock is partnering with , a quantitativeinstitutional asset manager. Dimensional runs the screens and emphasizes smaller-capcompanies with relatively low valuations and high profitability. The ETFs are reconstructedand rebalanced on a semiannual basis. The John Hancock MultiFactorLarge Cap ETF (JHML) was the largest of the company's ETFs at the end of the firstquarter with $21.4 million in assets.

Unlikethe other new entrants, Legg Mason does not screen stocks for its diversified coreETFs. Instead, stocks in the parent index are grouped into industries, and thenthose industries are evaluated based on correlations to one another and placed intoclusters. Each cluster receives equal weighting and is rebalanced on a quarterlybasis.

For theLegg Mason Low Volatility High Dividend ETF (LVHD), however, the company selectscompanies with high profitability and dividends, along with low volatility in termsof price and earnings. At March 31, it was the largest of Legg Mason's ETFs. Additionally,LVHD had the highest first-quarter return in the new entrants list.

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